The draft regulations on Qualifying Recognised Overseas Pension Schemes (“QROPS”) (The Overseas Pension Schemes (Miscellaneous) Regulations 2015) (the “Draft Regulations”)) published by HMRC on 19 December 2014 will have an impact on all Jersey pension schemes that have, or wish to achieve, QROPS status from a UK tax perspective and that are not managed by service providers in Jersey who are regulated. To this end Jersey pension schemes that have QROPS status, but fall outside of Jersey’s regulated regime, should urgently seek advice as to the possible consequences of losing QROPS status and the options available in the circumstances. The Draft Regulations have no direct application in Jersey but they must be complied with by pension schemes on the Island wishing to maintain or acquire QROPS status for the reasons stated below.
By way of background a scheme with QROPS status is able to receive transfers of pension funds from UK registered pension schemes without negative UK tax consequences on their members. If the scheme’s QROPS status is withdrawn, the members of the scheme may be liable to UK tax charges. The Draft Regulations, with any changes made following the consultation process, are due to come into force on 6 April 2015.
The Draft Regulations were published shortly before Christmas 2014 for technical consultation over a four week period. The consultation closed on 16 January 2015. One of the major changes proposed by the Draft Regulations is that overseas pension schemes are no longer required to designate 70% of the UK tax-relieved funds to provide a pension for members in order to qualify for QROPS status. However, once the Draft Regulations come into force, to the extent permitted by the legislation of the jurisdiction where the overseas pension scheme is established, it would be possible for the overseas pension scheme to pay their members 100% of their fund as a lump sum. It should be noted that Jersey’s legislation does not presently allow for this option. The change in the Draft Regulations has been proposed so as to align overseas pension schemes more closely with the changes that were made to UK registered pension schemes last year. In particular, it is now possible for a member of a UK registered pension scheme to withdraw 100% of his or her member’s fund as a lump sum without triggering a penal tax charge.
In place of the requirement to designate 70% of the UK tax-relieved funds to provide a pension for members, HMRC introduced the following new requirements for a scheme to qualify as an overseas pension scheme and therefore QROPS status:
- the management of the overseas scheme or the provision of the services provided by the scheme must be regulated by a body in the jurisdiction in which the scheme is established;
- the scheme manager must be regulated by that body in respect of the management of the scheme or the provision of services by that scheme; and
- the pension benefits payable to the member (including any lump sum benefits) must be payable no earlier than age 55.
The terminology used in the Draft Regulations is open to interpretation in terms of its application to Jersey’s regulatory regime. Specifically it is not immediately clear what is meant by the terms “management of the scheme” and “the provision of services by the scheme”. One interpretation would be that both the provision of trustee services and investment services carried out by or on behalf of a scheme need to be regulated by the Jersey Financial Services Commission (the “JFSC”) (although see below on the identity of the regulator for these purposes) in order to maintain QROPS status. In other words a trust company providing trustee administration services for a scheme needs to be regulated by the JFSC to undertake trust company business and an investment manager carrying out investment management or advisory services for a scheme needs to be regulated by the JFSC to undertake investment business for the purposes of the Financial Services (Jersey) Law 1998, as amended. Jersey schemes which currently have QROPS status but fall outside of Jersey’s regulated regime may, on the current wording of the Draft Regulations, lose their QROPS status.
A response to the technical consultation on the Draft Regulations has been submitted to HMRC to raise these concerns over precisely what is meant by “regulated”. Whilst it may be the intention of HMRC to regulate third-party QROPS (i.e. schemes which can accept non-resident members) by the proposed changes, it would seem a harsh result for Jersey pension schemes which only accept Jersey resident members to be regulated in the same way. QROPS status is important for such Jersey pension schemes to maintain, as their members may have transferred or wish to transfer their UK pension savings to Jersey. Therefore, the ability to have pension schemes with QROPS status is important for attracting skilled labour into the Island and it may form an important part of the remuneration package for workers coming from the UK.
It is foreseeable that Jersey occupational pension schemes, such as the States of Jersey Public Employees Contributory Retirement Scheme (PECRS) and the Jersey Teachers’ Superannuation Fund, might be affected by the proposed changes.
Furthermore, schemes that do fall within the regulated regime may still be affected by the Draft Regulations. It is not currently clear whether the new requirements under the Draft Regulations envisage that the person who manages the pension scheme may be regulated by a body which deals with the regulation of trustee services and investment services, such as the JFSC, or whether the regulation must be carried out by a body that specialises in pensions, such as a pensions regulator. As Jersey does not have a pensions regulator, if the Draft Regulations intend the latter to apply, no pension scheme in Jersey would be able to acquire or maintain QROPS status. The better view seems to be that so long as the pension schemes are regulated by a body that deals with the regulation of trustee services and investment services, the new requirements would be satisfied. However, this is another issue on which clarification is being sought.
Finally, the Draft Regulations have introduced new reporting requirements to HMRC in respect of QROPS of which scheme managers and administrators should take heed.